The importance of outlooks for investors
As we gear up for the new year, many of us are coming up with resolutions, budgets, and vacation plans. Some of us may also be concerned with investing strategies. And that’s where outlooks can play a helpful role.
So, where to from here?
Former US President Dwight Eisenhower once said, “Plans are worthless, but planning is everything.” While this is a quote that can be applied in almost any area of life, it is particularly fitting in the world of finance and economics.
Outlooks provide investors with a roadmap – be it on the macroeconomic environment, the assessment of geopolitical risk and how it may affect financial markets, or even for companies’ earnings – for a designated time period, which aim to give investors a heads up on what to expect and help them make informed decisions when it comes to investing. It goes without saying that because they involve attempts to make predictions about the future, which is of uncertain nature and comes with room for error, outlooks are also often adapted.
In any case, it doesn’t mean investors will follow the map precisely, especially as they often have individual needs and investment goals. But they represent an essential part of decision-making in the investment process, as they map out the most common outcomes that are expected over a certain time period in an objective manner.
Outlooks can span over the short term, usually up to six months ahead, and the long term, beyond that time frame. What do investors need to know to make the most of such forecasts?
For one, research by Germany’s Bundesbank that studied economic forecasts for the euro area and G7 countries found that, on average and from a statistical point of view, outlooks for macroeconomic variables and consumer price indexes were often only meaningful for two to three quarters in advance. A separate study by the International Monetary Fund comparing short- and long-term forecasts showed that predictive accuracy drops as the forecasting horizon lengthens, though not in a linear manner. Accuracy declined most between the three-month and two-year horizon. Interestingly, it also noted an optimism bias in long-term forecasts that look more than two years ahead. That shows that outlooks with a longer horizon should be taken with a pinch of salt.
Particularly for longer horizons – meaning more than two quarters – forecasts tend to be less useful when used as so-called point forecasts, which aim to predict exact, single numbers for a specific time period, than when they’re embedded in scenario analyses. Such scenario analyses provide information on the interdependencies that determine the economic development and explicitly explain the conviction of why and how any shifts would occur. They allow investors to continuously update and adapt the forecast and the scenarios they’re working with.
Another way to go is to blend forecasts, which involves taking many unbiased outlooks into account, as this can incorporate the so-called wisdom of crowds – the notion that large groups of people are collectively more knowledgeable and less biased than individuals, even if they’re experts. However, in order for that to be the case, it’s important that they truly are diverse and unbiased. That’s an important distinction because herd mentality among investors can move markets as they follow other investors’ moves and can be more emotionally driven instead of standing by their own assessments.
Long-term investors can more easily filter out the noise along the way as market conditions change. Even so, investors need to keep an eye on them and adapt if needed. As active managers, constantly adapting to changing environments is in our DNA, and, through this process, outlooks help light our way.
Returning to Eisenhower’s remark that planning is everything, that’s what we at Vontobel are focused on in order to achieve our goal of delivering future-proof investment solutions. And part of planning is allowing the time to consider different viewpoints on possible outcomes.
Click on the following outlooks from our investment boutiques to gain more insight.
Outlooks produced by Vontobel boutiques